renminbi in asean economy: how asean responds to renminbi

Journal of Economic Cooperation and Development, 40, 3 (2019), 1-24

Renminbi in ASEAN Economy: How ASEAN responds to Renminbi

Internationalization

Telisa Falianty1

Chinese Yuan Renminbi has been included in IMF Special Drawing Right since

the end of 2015. This momentum notified the increasing importance of

Renminbi (RMB) as a rising star of international currency. ASEAN plus 3 has

responded to RMB internationalization and the Asian financial crisis by the

Chiang Mai Initiative of Multilateralization (CMIM). This paper will explore the

impact of RMB internationalization on the movement of ASEAN member

exchange rates. This research would provide empirical evidence that RMB has

already become an important force in impacting the exchange rate of ASEAN

currencies. The framework of the empirical model from Frankel and Wei (1994)

and Ogawa and Shimizu (2006) are used to answer these questions. This research

found that the effects of Renminbi internationalization are significant in

explaining ASEAN currency movements, especially after ASEAN China FTA

(ACFTA). There is empirical evidence that increasing trade between

ASEAN and China could facilitate the increase use of RMB in the

ASEAN foreign exchange market.

JEL Classification: F15, F31, F33

Keywords: exchange rate, Renminbi, ASEAN China FTA, international

currency

Introduction

The natural response to the growing share of Chinese trade and

investment flow in world economy is the internationalization of the

Renminbi currency. According to SWIFT, more than 900 financial

institutions in over 70 countries are already doing business in the Chinese

1 Associate Professor Master of Planning and Public Policy Faculty of Economics and

Business Universitas Indonesia. Thanks for PITTA Grant from Universitas Indonesia to

support the financing of this research. Special thanks to Nuning Trihadmini, Risna

Triandhari, Annisa Khairatun, Lutfi Ridho, and Brameswara for their help on data

search. [email protected], [email protected]

2 Renminbi in ASEAN Economy: How ASEAN responds to

Renminbi Internationalization

Renminbi (RMB). Since June 2010, corporations worldwide can settle

transactions in RMB; SWIFT noted the spectacular growth in recent years

involves more than 10 per cent of China’s cross-border trade is now

settled in RMB. Even though Chinese yuan have a small proportion of

worldwide international currency usage (0.5%), is nonetheless

experiencing a stellar ascension. And now RMB is currently ranked fifth

for Asia-Pacific inflows and outflows with Europe, excluding the UK.

(SWIFT, 2015).

After the Asian Financial Crisis in 1997-1998, the role of Republic of

China (the PRC) in regional and global trade has increased significantly.

This phenomenon is due to the growth of export and import in China from

and to the United States, European countries, and Asian countries. Since

2015, the PRC is the world’s largest economy (on a purchasing power

parity basis), manufacturer, merchandise, exporter and importer, and

holder of foreign exchange reserves. China is a big player in the

international economy, but the question remains about whether or not

China is capable of sustaining its remarkable growth. One way of

measuring China’s growth as a world superpower is by looking at its

currency: the Chinese renminbi. If the renminbi can join the likes of the

Japanese yen, British pound sterling and Euro as an international

currency, there’s a strong economic case for continued Chinese growth in

the world economy. PRC’s economic power influences the countries in

the Asian region The story of the renminbi in Southeast Asia as a trade

settlement currency paints a clear picture about where the renminbi and

China are headed. The steady rise in China’s importance in the ASEAN

economies not only dethroned the United States’ historically strong ties

in the region, but continues to grow year after year. (Cheung, 2015).

One important history regarding RMB internationalization is the

inclusion of Chinese Renminbi in the basket of Special Drawing Right

(SDR) in December 2015. This marks the first time in over 15 years that

the list of currencies comprising the SDR has changed. The change was

agreed by the IMF’s executive board. This momentum is an important

milestone in the integration of Chinese economy to global financial

architecture. This achievement is also seen as a reward to Chinese

authorities that has been relatively successful in reforming their financial

and monetary system. This statement came from IMF managing director,

Christine Lagarde, in December 2015.

Journal of Economic Cooperation and Development 3

IMF also reformulated the basket of SDR. According to this new formula,

the weights of the currencies in the SDR basket are based on the value of

the issuers’ exports, the amount of reserves denominating the respective

currencies that were held by other monetary authorities, foreign exchange

turnover, international bank liabilities and international debt securities. The revised SDR basket is now on the following weights: 41.73 per cent

for the U.S. Dollar; 30.93 per cent for the Euro; 10.92 per cent for the

Chinese RMB; 8.33 per cent for the Japanese Yen, and 8.09 per cent for

the British Pound (IMF Survey Magazine, 2015).

Eichengreen and Kawai (2014) highlighted that the implications of RMB

internationalization are not just for the PRC but for other countries and,

more broadly, for the international monetary and financial system. The

effects of economic policies and conditions in the PRC will be stronger

for countries that come to rely broadly on the RMB in their international

transactions as their commercial banks will rely more heavily on RMB

funding. Their central banks are likely to place a bigger weight on the

RMB when managing the exchange rate and foreign exchange reserves,

especially for Asian countries including Indonesia. The Association of

Southeast Asian Nations (ASEAN) countries on average have intense

trade transactions with China, which has implications for ASEAN-China

financial transactions. The majority of ASEAN members have a Bilateral

Currency Swap Agreement (BCSA) with China since RMB

internationalization in response to the Asian Financial Crisis. RMB

internationalization has a logical implication of increasing China’s power

in the economy and trade, and underlines the importance of China as a

country which has the highest foreign reserve in the world (Figure 1).

Based on the above presentation, the purpose of this research is to analyze

the weight/share of RMB exchange rate movements in the currencies of

ASEAN member countries. Increasing share could become an indicator

of increasing used of RMB in ASEAN currencies. The additional

objective of this research is to analyze the factors that determine the extent

of RMB used in trade invoicing.



Figure 1: Foreign Reserve of Five SDR currencies (2001-2015)

Source: Central Bank of Indonesia Financial Statistics (External Sector)

Note: LHS : RRC and Japan Reserve

RHS: Euro, British, US

Existing Literature

Eichengreen and Kawai (2014) found that RMB can be a global currency,

similar to the US Dollar, or it can play a regional role in Asia equivalent

to that of the Euro in greater Europe. The research suggests that China,

which has a strong economic and political connection in with Asian

countries, will be the leading Asian currency. Ito (2011) noted that RMB

internationalization cannot be avoided. Many countries will use RMB in

their trade and capital market and then it can be added to the SDR basket

in the IMF. The rise of RMB will continue and will challenge the status

of the US Dollar as a major international reserve currency, though RMB

is more likely to become a regional currency throughout Asia.

Kawai and Pontines (2014) examined the behavior of the RMB exchange

rate and the impact of RMB movements on other currencies emerging in

East Asia during the period 2000–2014. They use the Frankel–Wei

regression model (1994) to identify changes in the RMB exchange rate

regime over time and a modified version of the model to estimate the

RMB weight in East Asian emerging economies’ currency basket. They


find that the US dollar continues to be the dominant anchor currency in

the region, while the RMB has taken on increasing importance in the

currency baskets of many East Asian economies in recent years.

Ito et al (1998) estimate the optimal weight of the US dollar and Yen in

currency basket to stabilize trade balance and capital flows in East Asia

before the Asian currency crisis. US dollar optimal weights were found to

be smaller than the weight gained by Frankle and Wei (1994) who found

the East Asian region adopts a dollar peg. It implied that the currency

basket peg system can stabilize trade balance than de facto dollar peg

system.

Exporter has the option to determine the currency used in the

determination of the price of goods. When the exporter does international

trade, they have the option to create an invoice in the currency of the

country, of the country's trading partners, or other currencies, called a

vehicle currency. The decision of the selection of the currency used in

invoice has an important role in the transmission of financial impact

across countries.

The decision for the election vehicle currency completes the analysis of

the factors that determine the selection of the invoiced currency. The role

of the currency is first as a medium exchange then the focus is not on the

trade itself but financial transactions. The selection of the currency is

associated with the low cost of a transaction. Low transaction costs reflect

a high degree of liquidity in the foreign exchange markets for the currency

in question (Portes and Rey, 1999).

The second analysis is related to the characteristics of the industry. The

industry consists of homogeneous goods and traders in specialized

markets prefer to generate the invoice using the currencies with the least

cost (McKinnon, 1979). If a currency is specified as the dominant

currency in a market, then there's no incentive for a particular firm to

create invoices in other currencies. This is because the use of other

currencies will result in high transaction costs and the level of sales will

be more volatile because of relative price movements compared to

competitors (Krugman, 1980). When the demand for an exporter is highly

elastic and marginal costs increase with output, the exporter has an

incentive to stabilize their price in the currency of its trading partners

(customers) (Bacchetta and van Wincoop, 2005).



The third analysis involves currency invoicing driven by the volatility of

macroeconomic condition in different countries. The company will

specify the currency used for invoicing, based on the country where the

level of volatility due to financial shock of the monetary aggregate is

moderate. More moderate volatility shocks minimize fluctuations in

currency exchange rates (other factor constants).

Methodology, Empirical Testing, and Data

The data that will be used are quarterly macroeconomic data from 2000

to 2015. It was collected from the CEIC database, International Financial

statistics, and Central Bank statistics from each ASEAN member. The

empirical method of this study is first the difference OLS regression

method that measures the impact of currency exchange rates of five major

currencies (in SDR basket) to ASEAN exchange rate member currencies

movement.

This study will use the model of Frankel and Wei (1994) and then make

modifications by adding the Chinese Yuan (CNY) or RMB into the

model. We will use the Swiss Franc as the base currency. The model is

presented below:

(1)

Where:

∆ log (ASEAN member/CHF) = movement of Rupiah to Swiss

Franc;

∆ log (USD/CHF) = movement of US Dollar to Swiss Franc;

∆ log (JPY/CHF) = movement of Yen to Swiss Franc;

∆ log (Euro/CHF) = movement of Euro to Swiss Franc;

∆ log (GBP/CHF) = movement of Pound Sterling to Swiss Franc;

∆ log (CNY/CHF) = movement of Chinese Yuan to Swiss Franc;

∆ log 𝐴𝑆𝐸𝐴𝑁 𝑚𝑒𝑚𝑏𝑒𝑟

𝐶𝐻𝐹 = β0 + β1 ∆ log

𝑈𝑆𝐷

𝐶𝐻𝐹 + β2 ∆ log

𝐽𝑃𝑌


𝐸𝑈𝑅𝑂

𝐶𝐻𝐹

+ β4 ∆ log 𝐺𝐵𝑃


𝐶𝑁𝑌

𝐶𝐻𝐹 + et


β0 = constant; β1 , β2, β3, β4, β5= coefficient of regression; et = error term

That coefficient of exchange rate of the five major currencies (SDR

currency basket) restrictions must equal one (β1 + β2 + β3 + β4 +β5=1).

This paper also analyzes the factors that determine the CNY/RMB

currency invoicing in Indonesia as a case study (because the data available

for the use of RMB is only accessible from Bank Indonesia). The

determinants of total used of CNY/RMB are derived from the existing

literature. A high degree of liquidity in the foreign exchange markets for

the currencies is proxied by China international reserves. The

macroeconomic variable from the country that will be used as vehicle

currency is proxied by the Manufacture Production Index of China. The

volatility of exchange rate is proxied by the log exchange rate of

CNY/RMB to USD. The model is specified below:

(2)

Where :

Ltotal_used = log total Renmimbi used in Indonesian international trade

(export + import)

LReserve =log China’s international reserve

Ltotal trade = log Indonesia international trade with China

(export+import)

LMPI_PI = log China’s manufacture production index

Lexchrate = log exchange rate (CNY to USD)

α0 = constant; α1 , α2, α3, α4 = coefficient of regression; et = error term

Analysis is only done for Indonesia. This is because of the data limitation

of CNY/RMB used in international trade in ASEAN countries.

Econometric analysis will be complemented by stylized facts and desk

study about each country's policy response in ASEAN countries regarding

RMB internationalization.



Stylized Fact and Each Country and ASEAN Responses to RMB

Internationalization

The discussion about Renminbi used in ASEAN countries would be

related to the ASEAN trade potential as well as ASEAN trade with China.

Intra ASEAN trade is depicted in Figures 2 and 3 below while ASEAN-

China trade is depicted in Figure 4 and 5. ASEAN member intra-trade

shows a slower trend in 2015, but the long-term trend is increasing.

Figure 2: ASEAN Member Export Intra-Trade (in US$)

Source: ASEAN Statistical Yearbook


Figure 3: ASEAN Member Import Intra-Trade (in US$)


Figure 4: ASEAN6 - China Trade (in million US$)




Figure 5: ASEAN 4 (CLMV) – China Trade (in million US$)


The increasing trend of ASEAN intra-trade and ASEAN-China trade (that

possibly comes from ASEAN China FTA results since 2010) could

become important support for RMB use in the ASEAN foreign exchange

market. ASEAN-China trade could intensify the use of RMB in their trade

settlements. As in the statement of Minikin and Lau (2013), China’s role

in international trade is a key driver for currency internationalization. It

seems natural that RMB will gain its role as a vehicle currency, given

China’s growing significance in the Asian and global economy. To

capture the ACFTA impact we can divide regression into two sub

samples, where sample 1 before ACFTA (before 2010), and sample 2 is

period after 2010 (after ACFTA).

Table 1. ASEAN+China Exchange Rate Statistics

Period 1: Before ACFTA (2000M1 – 2009 M12)

VAR RMB IDR MYR THB PHP SGD

OBSERVATION 2,509.00 2,506.00 2,509.00 2,509.00 2,507.00 2,509.00

MEAN 7.89 9,344.93 3.67 38.73 50.16 1.64

MEDIAN 8.28 9,207.60 3.80 39.41 50.96 1.68

MAX 8.28 12,209.00 3.80 45.80 56.45 1.85

MIN 6.81 7,037.90 3.13 29.32 38.96 1.35

STD DEV 0.55 844.99 0.18 4.21 4.51 0.14

Variation coef 6.92 9.04 4.90 10.87 9.00 8.27


Period 2: After ACFTA, Before Tapering Off (2010 M1 – 2013 M10)


OBSERVATION 940.00 940.00 940.00 940.00 940.00 940.00

MEAN 6.45 9,260.17 3.12 30.95 43.24 1.28

MEDIAN 7.80 9,132.40 3.10 30.79 43.26 1.27

MAX 6.84 11,573.10 3.44 33.21 47.46 1.42

MIN 6.11 8,450.90 2.94 28.62 40.54 1.20

STD DEV 0.23 532.79 0.10 0.96 1.56 0.06

Variation coef 3.57 5.75 3.29 3.09 3.60 4.46

Period 3: After ACFTA, After Tapering Off (2013 M10 – 2016 M12)


OBSERVATION 728.00 728.00 728.00 728.00 728.00 728.00

MEAN 6.29 12,709.58 3.67 33.67 45.28 1.33

MEDIAN 6.22 12,931.15 3.62 32.90 44.90 1.34

MAX 6.70 14,739.60 4.46 36.49 48.00 1.44

MIN 6.04 11,000.00 3.13 31.01 43.02 1.24

STD DEV 0.18 867.89 0.41 1.53 1.31 0.06

Variation coef 2.83 6.83 11.19 4.54 2.89 4.58

Source: Author’s own

In the three periods of sub-samples, China’s exchange rate to USD has

decreasing volatility. As a whole, we could conclude that in the period

after ACFTA, the volatility exchange rates of the ASEAN economy to

USD are lower on average. ACFTA could possibly help to stabilize

ASEAN member exchange rates.

In the period of tapering off from QE, Malaysia was hit hardest compared

to other members, regarding increased exchange rate volatility. On the

other hand, four countries over ASEAN-5 have higher volatility to USD

in the tapering off period, thus increasing the need to decrease dollar

dependency.



ASEAN responses related: Chiang Mai Initiative

Related to the topic of the use of RMB in ASEAN countries, the Chiang Mai Initiative (CMI) was established in response to the Asian Financial Crisis (AFC). CMI is a regional financial arrangement to supplement the existing international facilities. It can help facilitate promotion of RMB for ASEAN countries. CMI in the view of RMB internationalization could help liquidity aspect needed as prerequisites for international currencies. On May 2000, an agreement was signed in Chiang Mai, Thailand, where ASEAN +3 (Japan, South Korea, and the China) set up a partnership in an exchange system to ASEAN countries from the Asian crisis in 1997-1998, termed the Chiang Mai Initiatives. This agreement also included a policy that called for a Bilateral Swap Arrangement/Bilateral Currency Swap Arrangement (BSA/BCSA) between ASEAN countries and Japan, South Korean and the China. The BSA is a facility in the form of swaps of US dollars with the domestic currencies of participating countries. Repurchase agreements were meant to provide liquidity support through the sale and buyback of US treasury notes or bills with a remaining life of no more than 5 years and government securities of the counterparty country.(Garcia and Lee, 2013). In 2009, the bilateral swap mechanism was found to be inefficient. On March 24, 2010, it became multilateral and from then on it has been called the Chiang Mai Initiative Multilateralization (CMIM). Member countries are: Brunei, Cambodia, Hong Kong, Indonesia, Japan, Laos, Malaysia, Myanmar, the People`s Republic of China, Philippines, Singapore, South Korea, Thailand, Vietnam. The key role in governing CMIM lies upon Central Banks of those member countries. CMIM`s capital draws from a foreign exchange reserves pool worth US$120 billion and was launched on 24 March, 2010. This pool of reserves was expanded to US$240 billion in 2012.

China’s Bilateral Currency Swap Agreement (BCSA)

China has many BCSAs with several countries including ASEAN

members. The BCSA is a key pillar of cooperation between PBOC and

ASEAN countries, especially to strengthen regional economic resilience

and financial stability. According to Gui (2012), China launched BCSA

as its diplomatic campaign.


China is able to use this policy to reinforce their currency in a payment

system. Since July 2009, the PRC authorities started to allow exporters

and importers to use RMB to settle merchandise trade (Kawai and

Pontines, 2014). The BCSA’s by the People’s Bank of China (PBOC)

with ASEAN members are as follows.

Table 2. Renminbi-Denominated BCSA by the PBOC with ASEAN Members

Date signed Economy Value Note

CNY Billion ($ billion)

Aug, 2003 Philippines 2 Amended April 2007

Dec, 2011 Thailand 70 11

Feb, 2012 Malaysia (extended) 180 28.6

Increased from CNY

80 billion in Feb

2009

Mar, 2013 Singapore (extended) 300 47.8

Increased from CNY

150 billion in July

2010

Oct, 2013 Indonesia (extended) 100 16.3

Increased to CNY

120 billion in 2015

Notes: (i) Value in US Dollars is calculated based on the US Dollar-Yuan exchange rate at the

time of signing.

Source: ADB, People’s Bank of China; Asia Regional Integration Center (ARIC) Website; Yu

(2012); Bank of Japan

We also summarize the trade development in ASEAN members related to

RMB used and the financial agreement related with RMB used in Table

3 (compiled from various sources on ASEAN member websites and

compiled research).



Table 3. Trade and Financial Agreement/Condition Between ASEAN

Countries and China

Source : Summarized from Hongfang (2013), Tuazon (2014), Shipat (2015)

Country/

Explanation

Indonesia Malaysia Singapore Philippines Thailand

Trade

Condition/

Bilateral

Agreement

- RMB invoicing has

increasing trend.

- Export share in USD

and Japanese Yen has

decreasing trend.

- USD invoicing is still

dominant (above

90%).

- RMB used in

Indonesian imports

remains low.

- China is Malaysia’s

larget import source with

12% of total.

- Malaysia is China’s

largest trading partner

among the 10 members

of ASEAN.

- China is

Singapore’s

largest trading

partner while

Singapore is

China’s third

largest trading

partner in

ASEAN.

- The data shows

from 2000 until

2015, the export

from Philippines

to the PRC and

import from the

PRC to

Philippines always

increases.

- The data

shows from

2000 until

2015, the

export from

Thailand to

the PRC and

import from

the PRC to

Thailand

tends to

increase.

Finance

Agreement

- In Oct 2013 BCSA

with China 100billion

Yuan.

- In 2015, BCSA 120

billion Yuan.

- The arrangement will

contribute positively

to an increase

in trade and

direct investment, help

provide short-

term liquidity to stabil

ize the financial

market, and help to

overcome tight

liquidity from

overseas funds.

- August 2010 direct

quotes between RMB and

ringgit in the interbank

foreign exchange market

on the CFETS (China

Foreign Exchange Trade

System).

- The RMB was included

in the national RGS,

- Bank Negara signed a

MoU) with the People’s

Bank of China (PBoC) in

Beijing to establish yuan

clearing arrangements in

Malaysia.

- In Apr 2015, agreement

to renew its BCSA for a

further term of three

years with the size

maintained at 180 billion

yuan/ 90 billion ringgit

-In March 2013

Singapore

increased the

number of BCSA

agreement to 300

billion yuan (before

only a half ; 150

biilion Yuan)

- In August 2003,

BCSA with China

2 billion Yuan.

- In 2006 Yuan is a

currency

convertible with

the BSP, thus it is

an acceptable

currency for

export receipts.

- In Dec 2011,

BCSA with

China 70

billion yuan.

- Jan 2015

PBOC

officially

authorized

ICBC (Thai)

to act

as RMB clear

ing bank in

Thailand

Country/

Explanation

Brunei Darusalam Vietnam Cambodia Myanmar Laos

Trade

Condition/

Bilateral

Agreement

- Boosting trade

between China and

Brunei through

Brunei-Guangxi

economic corridor.

- China is a third import

origin for Brunei.

- In terms of trade, China

is the largest market for

Vietnamese imports and

among the top markets

for Vietnamese exports.

- Agreements with China

for Renminbi direct

trading in Guangxi

province.

- Increasing trade

relations between

China and

Cambodia, up to

3.75 billion USD

in 2014, 4.31

billion USD in

2016, predicted to

increase to 5

billion USD in

2016.

China is

Myanmar’s second

destination export

China is

Laos’ top

export

destination.

Finance

Agreement

- Baiduri Bank launched

RMB Payment

Services.

Vietnam keeps an eye on

cross-linkage exchange

rates between the RMB

and other major

currencies.

Vietnam doesn’t have

currency swap agreement

with China.

- In mid-2010, the

RMB was widely

accepted by shops

in many tourist

spots of

Cambodia.

Cambodia has

announced that

RMB is welcome

in their markets.

Myanmar doesn’t

have a currency

swap agreement

with China.

Feb 2014, the

PBOC branch

helped in the

establishment of

CITIC RMB

Capital in Yunan

Province.

-Nov 2012,

ICBC

Viantiane

Branch was

granted RMB

clearing

center status.

2011, two

Chinese

banks started


Results and Discussion

The Impact of Renminbi on the Movement of ASEAN Member

Exchange Rates

For identifying the impact of Chinese Yuan/RMB exchange rate to the

ASEAN member exchange rate, a simple regression following Frankel

and Wei (1994) and Ogawa and Shimizu (2006) is used. We ran the

regression for ASEAN-5 countries.

Table 4. Regression Result with Full Sample in ASEAN 5 countries

Country Sample USD/CHF JPY/CHF EUR/CHF CNY/CHF GBP/CHF Constant Adj R 2 DW

Indonesia

2000M1-

2015M12 0.446*** 0.045 0.326* -0.064 0.222 0.003 0.247 1.702

(3.537) (0.440) (1.878) (-0.125) (1.519) (1.501)

Malaysia

2000M1-

2015M12 0.617*** 0.265*** 0.073 5.476*** -0.096 -0.032 0.920 0.311

(10.674) (7.176) (1.140) (6.302) (-1.487) (-0.202)

Singapore 2000M1-2015M12 0.539*** 0.095*** 0.146*** 0.551*** 0.124*** -0.001 0.828 1.616

(15.494) (3.329) (3.056) (3.915) (3.080) (-1.199)

Thailand

2000M1-

2015M12 0.933*** -0.056 0.060 0.493* -0.150 0.002 0.745 1.326

(8.672) (-0.733) (0.548) (1.709) (-1.036) (1.121)

Philippines

2000M1-

2015M12 0.846*** 0.003 0.138 0.302 -0.008 0.001 0.683 1.355

(13.169) (0.056) (1.569) (1.163) (-0.102) (0.838)

Source : Author’s own

Note: Full sample 2000M1-2015M12

In all five ASEAN countries, the USD is statistically significant in

determining the change of each exchange rate ASEAN members. What

about Chinese Yuan (CNY)/Renminbi? CNY is statistically significant

for ASEAN-5 members, except for Indonesia and Philippines. On the

other hand, the Japanese Yen is significant only for Malaysia and

Singapore. The Euro is significant only for Indonesia and Singapore. The

Pound Sterling is not significant in ASEAN 5 members, except for

Singapore. All currencies included in SDR (USD, Yen, Euro, Pounds,

CNY) are significant in explaining the movement of the Singapore Dollar.

The above result is the first general result with a complete model and full



sample and should be explored further. First, we should be careful of the

multi co-linearity problem. There are potential correlations between each

currency, especially with USD as the main international currency.

Second, the sample could be divided into two sub-samples concerning the

impact of ASEAN-China FTA. Increasing trade relations with China

could increase the use of its currency.

The results of correction for the multi co-linearity problem are as follow.

Table 5: Regression Result Correcting For Multi co-linearity (Full Sample)

Country Sample Reg USD/CHF JPY/CHF EUR/CHF CNY/CHF Constant Adj R 2 DW

Indonesia

2000M1-

2015M12 (a) 0.535*** 0.032 0.441*** - 0.003 0.258 1.663

(4.781) (0.313) (2.823) - (1.613)

(b) - 0.048 0.454*** 0.521*** 0.004* 0.252 1.654

- (0.469) (2.903) (4.598) (1.891)

Malaysia

2000M1-

2015M12 (a) 0.823*** -0.058 0.069 - 0.001 0.713 1.238

(16.919) (-1.315) (1.017) - -1.162

(b) - -0.007 0.062 0.861*** 0.002** 0.747 1.279

- (-1.579) (0.329) (18.673) (2.247)

Singapore 2000M1-2015M12 (a) 0.590*** 0.088*** 0.211*** - -0.000 0.808 1.559

(18.133) (2.958) (4.667) - (-0.989)

(b) - 0.089*** 0.212*** 0.606*** 0.000 0.820 1.588

- (3.113) (4.846) (19.113) (0.843)

Thailand

2000M1-

2015M12 (a) 0.690*** 0.064 0.170** - 0.000 0.642 1.326

(12.599) (1.262) (2.222) - (0.008)

(b) - 0.080 0.183** 0.686*** 0.000 0.637 1.393

- (1.644) (2.418) (12.652) (0.721)

Philippines

2000M1-

2015M12 (a) 0.844*** 0.004 0.135* - 0.000 0.684 1.348

(14.858) (0.939) (1.707) - (0.816)

(b) - 0.017 0.146* 0.844*** 0.001 0.679 1.355

- (0.325) (1.828) (14.625) (1.733)


Note : *** significant in 1%, ** significant in 5%, * significant in 10%


Table 6.Summary of Two Period Samples Results

Country

Before ACFTA After ACFTA

CNY Share CNY USD CNY USD

Indonesia 0.356 0.368 0.816 0.828 Increase

Malaysia 0.877 0.870 0.861 0.772 Decrease

Singapore 0.573 0.564 0.637 0.607 Increase

Thailand 0.579 0.581 0.894 0.895 Increase

Philippines 0.820 0.808 0.826 0.851 Increase Source : Author’s own

between China andASEAN, but also contributed to the regionalization of

the renminbi.

From the several regression experiments, we have four of ASEAN-5

countries that have an increasing share of CNY in their currency after

ACFTA implementation. The only country that has a decreasing share is

Malaysia. The finding of increasing share is similar to Gui (2012). He also

found that the effect of renminbi on ASEAN currencies has experienced

a significant growth during the two sample periods while the effects of

Japanese yen diminished. The renminbi is more likely to be the Asia

anchor currency than Japanese yen. Gui (2012) also stressing the role of

ASEAN-China Free Trade Area that not only increased the trade volume

2.The Factors Affecting Currency Invoicing: The Case of Indonesia

The additional objective of the research is to analyze the factors that

affecting currency invoicing for RMB/CNY But we apply only to the case

of Indonesia because of data availability reasoning.



Table 7. Regression Result Factor That Determine Currency Invoicing


Note : *** significant in 1%, ** significant in 5%, * significant in 10%

In theory of the demand for currency, the use of a country's currency is

influenced by internal factors, external factors and an inertia factor. In the

case of demand for RMB, an internal factor is China's foreign exchange

reserve and China Manufacture Production Index. External factors are

trade between Indonesia and China, and the inertia factor is the use of

RMB in the previous period.

Based on the result of the regression, China’s international reserve, total

trade with China, and log of the RMB exchange rate are significant in

determining the use of RMB. The China Manufacture Production Index

did not significantly affect the RMB currency invoicing either in Model 1

or Model 2. Again, we find that trade could boost the use of RMB.

In Indonesia’s case, it is clear that the export share in RMB invoicing has

an increasing trend. On the other hand, the export share in USD and

Japanese Yen has a decreasing trend. However, USD invoicing is still

dominant in terms of number (still above 90 per cent, Figure 6 and 7).

Dependent : LTOTAL_USED=total Renminbi used in Indonesia trade

Sample: 2012M01 2015M12

Variable

Model 1 Model 2

Coefficient t statistics Coefficient t statistics

C -27.915 -1.681 -4.710 -0.576

LRESERVE 0.994* 1.818 0.354 0.935

LTOTAL_TRADE 0.579** 2.059 0.428 1.586

LMPI_PI 0.139 0.096 -0.550 -0.389

LEXCHRATE 4.581 1.597 - -

LTOTAL_USED(-1) 0.578*** 4.339 0.568*** 4.189

Adjusted R2 0.317 0.292

DW stat 1.637 1.604

F statistic 5.358 5.848


Figure 6: Export Share in Five SDR Currencies and Indonesian Rupiah

Note: LHS: Export Share in Euro, Pounds, JPY, RMB, Rupiah; RHS : Export Share in

USD


Figure 7: Import Share Five SDR Currencies and Indonesian Rupiah

Note: LHS: Import Share in Euro, Pounds, JPY, RMB, Rupiah; RHS : Import Share in

USD




In contrast to exports, RMB used in Indonesian imports is still low (even

with a small increase) but still far from the other four SDR currencies.

USD also has different trend. After tapering off, the decreasing trend

diverts to an increasing trend. A strong USD is the reason for this

diversion in pattern. Another interesting fact is that the import share in

Rupiah has increased significantly in the observation period. The

phenomenon is called local currency invoicing.

The fact that import invoicing for RMB is still low showed that even

Chinese exporters still do not prefer to receive payments from Indonesian

importers in the RMB denomination. To increase RMB

internationalization in the future, Chinese exporters should have the

preference of also using RMB (their own currencies) and not only USD.

Indonesian imports from China have an increasing trend which is large in

terms of value, but the use of RMB invoicing was very far from expected.

Conclusion

From the data, we can conclude an increasing RMB role in ASEAN

economies through the significance of RMB/CNY in explaining ASEAN

member exchange rate movements. With the Asian financial crisis lessons

learned, the Chiang Mai initiative, the increasing role of China in the

world economy, increasing global turbulence, and also greater integration

between ASEAN countries and China through ASEAN China FTA, and

the strong USD and lack of USD liquidity, together could enforce the

increasing use of RMB in ASEAN economy transactions. The regression

results show the increasing importance of RMB in explaining ASEAN

member exchange rate movements.

Increasing trade relations could boost the use and intensity of RMB used

and diversify invoicing currencies in reducing exchange rate volatility to

USD. The evidence comes from the increasing CNY/RMB share in the

majority of ASEAN member countries after ASEAN China FTA. The

increasing use of RMB/CNY also could relate to the effort from China in

making BCSA with ASEAN members. BCSA could possibly facilitate

the increasing use of RMB/CNY. The Indonesian case also gives

empirical evidence for the significance of trade in the story of RMB used

(even with sample limitations). For the next research topic, using all

ASEAN member currency invoicing models, we could extend more


comprehensive analysis in finding the factors that affect currency

invoicing and also assess the effectiveness of BCSA in increasing the use

of RMB in ASEAN countries.



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